Government Expenditure in Europe

Europe is the region of the world where government expenditure represents the largest share of GDP – roughly 46%. This is largely because Europe is home to the most comprehensive and developed social safety nets in the world. In fact, over 70% of government expenditure in the EU is linked to citizens’ wellbeing, whether in the form of social protection, health, housing or education. Thanks to these high levels of social protection, Europeans have generally been better sheltered from recent increases in inequality that have affected other developed and emerging economies, threatening their internal cohesion. Importantly, the EU and its Member States have managed to maintain these high levels of government spending, while at the same time significantly improving their fiscal sustainability. In 2017, the EU’s public deficit amounted to just one fifth of that of the US, and one quarter of that of Japan. Public debt in the EU is also considerably lower than in the US, standing at 83% of its GDP in 2017, compared to 108% in the US, and as much as 240% in Japan. Nonetheless, interest payments on public debt stock still represent a meaningful – albeit limited – share of EU governments’ expenditure. While accounting for a moderate 2.2% of GDP on average, they vary significantly, from 0.2% of GDP in Estonia to 4.3% in Portugal. And, even though no EU Member State currently faces short-term fiscal sustainability risks, the medium- to longer-term fiscal implications resulting from the end of accommodative monetary policies, and, more importantly, from an ageing population and a shrinking workforce, will present challenges for as many as half of the EU’s Member States.1 There is increasing consensus that, in a rapidly changing world, government expenditure – including social expenditure – needs to be oriented ever more towards investing in the future, to enable citizens and economies to better face the challenges ahead. In the EU, only a handful of Member States are really thinking long-term when setting their public investment priorities. Countries like Denmark and Sweden, for instance, currently allocate 6.9% and 6.6% of their GDP respectively on education, as well as 2.2% and 1.8% on R&D – far more than many of their counterparts. Naturally, government finances are not just a question of deficits and surpluses, or of where one spends ones money – but also one of quality. How governments spend their resources matters. Experience in the EU Member States shows that very different levels of social protection spending can in fact achieve similar outcomes. Vice versa, similar levels of spending can also result in very different outcomes. The following overview of government expenditure by function across Member States nevertheless suggests that there is a significant margin for improvement in the way that the EU and its Member States use their fiscal resources. Without compromising on the wellbeing and protection of citizens, more (and better) resources should be targeted towards future-oriented areas like innovation, research, education, training and defence.

European Political Strategy Centre
https://ec.europa.eu/epsc/sites/epsc/files/epsc_-_where_eu_governments_spend.pdf